Fintech firms struggle to come together for self-regulation

Synopsis The idea of creating an SRO was mooted by the RBI governor in March. But more than a month since, the companies haven’t been able to proceed beyond initial discussions to band together and get the groundwork laid out. ETtech Coming together to form a self-regulatory body is a challenging task for the payments industry given its diverse players (Illustration: Rahul Awasthi) Deeply impacted by the ever-changing regulatory landscape of the country, digital payments players are in talks to set up a self-regulatory organisation (SRO) to create common rules and standards of operation for their business.

The idea of creating an SRO was mooted by the Reserve Bank governor at a conference organised by the Department of Payment and Settlement Systems in March. But more than a month since, the companies haven’t been able to proceed beyond initial discussions to band together and get the groundwork laid out. Two people in the know of the matter told ET that the Payments Council of India (PCI), an industry body of payment players, wanted to take on the role of an SRO.

But the central bank opposed the application, as the PCI has multiple unregulated entities as its members. The council is a subsidiary of the Internet and Mobile Association of India (IAMAI), which counts large tech majors like Facebook, Google and Amazon among its members. Emailed queries to the IAMAI did not elicit a response till press time Thursday.

“The RBI wants all regulated payment companies to come together and form a single SRO,” said the founder of a platform who was present at the March 18 conference in Kochi where governor Shaktikanta Das suggested the idea. This industry executive spoke on the condition of anonymity given the matters are still at a discussion level. Coming together to form a self-regulatory body is a challenging task for the payments industry given its diverse players, like UPI apps , mobile wallet companies , ATM service providers, clearance corporations, business correspondents and others.

Discover the stories of your interest Blockchain 5 Stories Cyber-safety 7 Stories Fintech 9 Stories E-comm 9 Stories ML 8 Stories Edtech 6 Stories “There are very limited conversations that happen between each of the segments of the payments industry; to bring all of them together under a single umbrella is going to take time and will be challenging,” said another founder of a large payments company. The PCI has committed to driving this at the Kochi conference, this person said. So even if they cannot become part of an SRO, the top executive committee members in the body can take the initiative to bring the industry together.

Other industry bodies like the Confederation of ATM Industry and the Business Correspondents Federation of India are also looking to send their application for an SRO, people in the know said. Closer scrutiny Large parts of the payments industry grew in an unregulated fashion. While the RBI gave prepaid payment instrument licences for consumer payments, payment aggregators and gateways did not have any such licensing mechanism till recently.

Now, when the RBI is looking closely at payment aggregators for the licensing process, it has discovered that several players have flouted KYC rules to attain quick growth. The central bank has asked the likes of Paytm and PayU India to reapply for their payment aggregator licences and halted new merchant onboarding by all the major players like Paytm , PayU , Razorpay and Cashfree. The regulator feels an SRO mechanism is the best way forward for this large industry to grow in a responsible fashion.

RBI data show in January 2023, the industry processed more than 10 billion digital payment transactions , settling a total amount of Rs 51 lakh crore. The RBI has made it clear that the SRO’s board should be independent, and that they should be professionally run with no industry participants holding top positions in the body. At the Kochi conference, it took the example of the Indian Banks’ Association to give direction to the payments industry on an ideal SRO structure, said another payment company founder who was also present at the conference.

The SRO, as per the initial discussions, will look after a centralised ‘negative database’ of merchants, enabling data sharing between payment aggregators, to ensure that faulty or illegal entities are not onboarded by rival gateways. While the conversation has been ongoing for years, it still has to be seen whether such a platform can be implemented since most players in the aggregator space are competitors and may not be comfortable to share their data with others. “The RBI made it very clear at Cochin that if we do not want them to micromanage this sector, we need to get the industry together and create an SRO framework,” the first startup founder cited in this story said.

“I think as a mature industry, we should be able to get together and create standard procedures. ” Focus on wider sector To put things in context, the regulator is not talking about an SRO only for the payments industry. It wants even the digital lending players to create an SRO structure.

The Fintech Association for Consumer Empowerment (FACE) had applied to become an SRO for the digital lending industry in January 2022. “Nothing much has moved beyond that point. There were presentations made to the RBI and a structure was put in place, but nothing beyond that,” said the founder of a fintech lending startup which is a member of FACE.

Within the fintech industry, the lending sector was under a closer scrutiny of the regulator given the issues with the Chinese loan app scam and unregulated entities operating as lenders in the online world. The RBI was very keen that an SRO gets formed with responsible members to check unregulated activities in the otherwise strictly controlled lending industry. Don’t miss out on ET Prime stories! Get your daily dose of business updates on WhatsApp.

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